In addition to medical services, Medicare/Medicaid reimburses hospitals for other costs related to medical treatment including capital expenditures on machinery or new buildings. This is largely why Medicare spending accounts for nearly 20% of all national healthcare expenditures. The fee-for-service portion of Medicare, codified in Parts A and B of the act, constitutes the majority of Medicare spending. In this reimbursement model, the government pays physicians and other healthcare providers directly for each service delivered to a program beneficiary. The healthcare institutions that provide Medicare/Medicaid services are required to submit annual cost reports to the Centers for Medicare and Medicaid Services (“CMS”) as part of their reimbursement contracts. The fee-for-service model is frequently the target of fraud, mostly accomplished through inflated cost reporting. Fraudulently inflating these costs to receive more money from the federal government may be a violation of the FCA.
Inflated cost reporting can occur when healthcare providers falsify the costs and statistics related to patient care, inflate the number of services provided to Medicare patients rather than to the privately insured, and seek reimbursement for services that either unrelated to patient care or are provided to non-Medicare patients. The difference between the resulting inflated price and the actual price paid by healthcare providers is colloquially known as the “spread.” The larger the spread on a particular drug, the more profit a healthcare provider stands to gain.
In the fee-for-service model, inflated cost reporting can also occur in much more subtle ways. In this type of healthcare arrangement, physicians and other providers often face financial incentives to provide more care than would best suit a patient’s interests. Similarly, when insurance pays most of the costs associated with healthcare, providers have little financial incentive to control costs and may overprovide healthcare services. In the broader healthcare industry, this is known as the moral hazard and principal-agent problems, and they can still constitute FCA violations.
In 2007, the Loma Linda Behavioral Medicine Center agreed to pay the government over $2 million to settle a case under the FCA which alleged that the company submitted false cost reports to Medicare for reimbursement. Specifically, the company sought reimbursement for startup costs for abandoned projects or other costs not related to patient care. By manipulating and falsifying cost reports to inflate the reimbursement by Medicare, the company allegedly violated the FCA.
In late 2010, Dey Inc., Dey Pharma L.P., and Dey L.P. all agreed to pay the government $280 million to resolve FCA claims that they reported false and inflated prices for numerous drugs with full knowledge that Medicare and Medicaid relied on those reported prices to set payment rates. Since payment rates for a number of drugs were based on Dey’s inflating cost reporting, the DOJ alleged that Dey caused false claims to be submitted to the government, and the government in fact paid millions of claims for a much higher amount than they would have otherwise paid.
In December 2010, Abbott Laboratories Inc. and other affiliated entities agreed to pay $421 million to the government to settle FCA allegations that it inflated the cost reports of numerous drugs on which the Medicare and Medicaid relied for payment rates. This settlement was announced only days after the Dey settlement.